Chuck Jaffe: Three ways investors can avoid scams, rip-offs
BY CHARLES JAFFE Market Watch
Wednesday, October 31, 2012
10/31/12 at 7:08 AM
James Elton Warr didn't catch investors by promising astronomical returns; he got them by comparing his results, which he promised would continue, against the stock market.
But the Warr Investment Group of Austin, Texas, was showing its purported 8 percent annual gains against a particularly poor time frame for the stock market in order to look good. And Warr wasn't even running his investment business during the time frame he was showing.
Alas, investors who might have been able to figure out Warr's Ponzi scheme with a few simple steps never did. According to the Texas State Securities Board, which forced Warr Investment Group into receivership earlier this year, Warr raised about $1.1 million from investors and used a significant portion of the funds to pay commissions to unregistered sales agents, to cover his travel and dining expenses, and to buy an E350 Mercedes Benz.
Instead of getting their promised 8 percent annual returns from his real estate program, which he promoted as both safe and lucrative in Internet advertising and YouTube videos, investors were lucky to get away with a loss of 66 percent. They were lucky because the Texas regulators got there before all of the money and assets were gone.
Although regulators would have a long list of safeguards and checks, here are three efforts that, if done properly, will keep investors from being ripped off.
1. Check the registration of the adviser and the securities.
One call to the state securities administrator in your area should be sufficient to make sure the basics are in place.
Consider the case of John F. Langford, sentenced in September to up to 15 years in prison for stealing nearly $7 million from dozens of investors in Texas. Langford, a former insurance salesman from Amarillo, told investors they were buying "private annuities," that in reality were fraudulent promissory notes.
Langford wasn't registered to sell securities; his "investments" weren't registered, either. Calling the Texas State Securities Board would have made that evident.
The cost of not making the call? Of the $7.55 million investors put into the fraud, there was $212,126 left for restitution; victims are getting back 2.8 cents for every dollar they gave Langford.
2. Dig into illustrations and comparisons for inconsistencies and nonsense.
The same way that legitimate investment firms don't advertise the returns of their worst funds, the promoters of investment frauds and scams fail to disclose key facts, and make statements and comparisons that fall apart under scrutiny.
That's how the Warr case played out. An investor who noticed the time frames - how it was a terrible time for the market, or a time when Warr's company wasn't even operating - would have been worried enough to ask more questions or simply run away.
3. Talk to your family - or someone you trust besides the sales person - before investing.
Your family may not know better about money than you do - and you may worry that their recommendations are based on their desire to someday have your money themselves - but they provide a great sounding board, just in case you haven't recognized the sound of "too good to be true."
"One hopes that family always has your back and is going to at least give you a sounding board for your decision to invest in uniforms for the Japanese army - that's an actual case - or whatever you are being sold," said Bryan Lantagne, director of the Massachusetts Securities Division. But family is also important because "seniors have the money and are, more often than not, the target of these folks. We have, over the years, received many a call from family members saying that their folks had talked to them about a call they received that just didn't seem right."
Original Print Headline: Three ways investors can avoid scams, rip-offs
Chuck Jaffe, senior columnist for MarketWatch, can be reached at firstname.lastname@example.org or at Box 70, Cohasset, MA 02025-0070.